Piece Rate System Advantages and Disadvantages | Free Cost Accounting Articles
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Piece Rate System
Meaning
Under this system, each unit, job, operation or process is known as a piece. A piece rate is fixed for each unit or job or operation or process. The workers are paid on the basis of the number of pieces completed irrespective of the time spent by the worker on the job. Payment of overtime or idle time has not arisen in this case. Record of work time and attendance is recorded on the time card, piece work ticket records the output by the workers.
Under this system, wages are paid on the basis of the number of articles produced by the workers. Piece rate system can be of the following types:
(i) Straight piece rate
Under this system, each unit produced is taken as a piece. A piece rate is fixed for a unit of product produced. It can be calculated in the following way:
Earning = No. of piece produced x Piece rate
(ii) Piece rate with guaranteed wages
Piece rate with guaranteed wages is applicable for the new and in efficient workers. They earn meagre salary instead of paying normal piece rate and this encourages the workers to improve their efficiency gradually and there afterwards reach the standard of other workers
(iii) Differential piece rate system
Under this system, the wages of workers vary at different stages, within a certain range of output. The two systems which works under this principle are:
(a) Taylor’s differential piece rate system, and
(b) Merrick’s differential piece rate system.
- First in First out Method (FIFO)
- Last in First out Method (LIFO)
- Simple Average Method
- Weighted Average Method
Advantages of Piece Rate System
1) It is Simple to calculate wages because Piece Rate is fixed first.
2) The wages are calculated on the basis of Pieces of output. Management has not to lose on account of inefficiency or workers.
3) The wages are directly linked with output. The workers are motivated to make a good and greater effort of assuring higher income.
4) The Labour cost is lower due to higher labour productivity and efficiency and minimization of idle time or overtime.
5) Low degree of supervision is required.
Disadvantages of Piece Rate System
1) It is very difficult is fix the piece rate. Many times it is difficult to establish standard output and hence to fix piece rate.
2) The worker is neither assured of regular income nor can enjoy social benefits like leave, allowances, etc.
3) This method is not suitable in the case of jobs like research repairs, quality control, inspection, etc.
4) This method is expensive as it requires additional expenditures for installation and operation.
5) If the wages are not guaranteed, the worker, may lose earnings especially when the continuous flow of work can not be maintained.
